Increasing currency costs for foreign treasury buyers

Bloomberg: Asian currencies look set for a bumpy ride over the next three months after Federal Reserve Chair Janet Yellen said Friday that the case for an interest-rate rise has strengthened, amid growing speculation the hike could come as early as next month. Yellen’s statement will create some volatility over the next three months, Raymond Yeung, chief economist at ANZ Banking Group in Hong Kong, said by phone. “The cost of the U.S. funding will increase, and Asian currencies will be under downward pressure.”

Using economic terms, by what channel will this increase ten year safe rates?  The currency risk channel for foreign holders of US  treasury bonds.  They have to redeem and spend in their home economies where they locate, they suffer the risk of currency exchange.   That raises the minimum acceptable yield foreign investors will accept.  That number was 1.5%, on the ten year, now it is above 1.6, closer to 1.75, likely.  We have a bottom on the ten year yield.  And we have a top, around 2.5; after that, interest payments will bear down on government finances.  That is a narrow corridor.

The US Congressional budget is becoming less liquid, more constrained by legal entitlement obligations.  Hence, when we could suffer 22% of the budget toward interest, we can now suffer only about 15%.  The government corridor for price discretion is closing, especially the state and local governments struggling with pensions.